As all of us know, taxes are one of the unavoidable facts of life. So what happens when they’re not paid? You might have heard the terms “tax evasion” and “tax avoidance”. Despite sounding similar, these terms mean two completely different things, and can result in very different outcomes.

Tax Evasion

According to the IRS, the definition of tax evasion is “the failure to pay or deliberate underpayment of taxes”. This might look like failing to report some or all of your income to avoid income taxes. This underreporting is sometimes due to people doing illegal activities, like gambling or stealing goods in order to hide the activities from the government. Other ways people evade taxes are working jobs or hiring people “under the table” and not reporting tips from babysitting, garage sales, tutoring, yard work and other commonly unreported activities.

Consequences of Tax Evasion

The consequences of tax evasion can vary depending on the amount of the underpaid taxes. Penalties can vary from financial penalties to a year or more in jail for offenses. The IRS will require any back taxes to be paid, and you might even face a lien on your home, car or other large assets until back taxes are paid.

Tax Avoidance

As opposed to tax evasion, tax avoidance is perfectly legal. The definition of tax avoidance is “an action taken to lessen liability and maximize after-tax income. The IRS allows taxpayers to make all kinds of deductions to their taxes. Some people may be eligible for deductions based on interest they pay on mortgages, and others qualify for child care tax credits. Other examples of activities that can result in tax deductions are:

• Donating to charity
• Paying for college expenses
• Purchasing equipment for your business
• Paying medical expenses
• Installing solar energy systems in your home

Even though there are countless deductions available to lessen the burden of taxes, you must prove you are eligible, or be able to prove you are eligible to receive them. Tax credits and deductions can look a bit different for businesses as well. To learn more about business tax deductions, take a look at the Credits and Deductions For Businesses page on the IRS website.

Key Differences in Evasion Vs Avoidance

The main difference between tax evasion and tax avoidance is that evasion is an illegal activity meant to deliberately dodge tax expenses, and avoidance is the highly encouraged, legal method for reducing the amount of taxes you pay. In many ways, tax avoidance is the result of good financial planning and accurate reporting practices. There are many ways you could practice tax avoidance, including researching different credits and deductions you’re eligible for, or taking steps to become eligible by making donations to charities and keeping accurate and complete business records to report your expenses and incomes properly.

Importance Of Understanding Taxes

Understanding the laws and regulations of taxes can benefit you by avoiding consequences for unpaid or improperly handled taxes, and often saves you a lot of money as well. For example, if you don’t understand tax incentives or how to claim certain things when filing taxes, you might be missing out on hundreds, if not thousands of dollars of savings or kickbacks. In this way, understanding taxes is an essential skill in order to advocate for yourself and position your business for financial success.

How To Learn More About Taxes

With the right tools and resources, you’ll be savvy with your business taxes in no time. Contact us today to speak to our knowledgeable advisors and learn more about how to do your business tax planning, preparation and more.